Summary.
An auction with a buyout option is modelled. Such an option allows a bidder to purchase the item being auctioned at a pre-specified buyout price, instead of attempting to obtain the item through the traditional auction procedure. This analysis is motivated by internet auctions where such options are present. If all auction participants are risk neutral, the seller will choose a buyout price high enough so that the option is never exercised. However, a risk averse seller facing risk neutral bidders will choose a price low enough so that the option is exercised with positive probability. Further, if bidders are risk neutral and the seller is risk averse, this option may result in a Pareto improvement compared to a sealed bid second price auction.
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Received: 3 December 2002, Revised: 28 September 2004,
JEL Classification Numbers:
D44, L86, D8.
Correspondence to: Timothy Mathews
We would like to thank Yair Tauman, Thomas Jeitschko, Pradeep Dubey, Konstantinos Serfes, Abraham Neyman, Qihong Liu, and an anonymous referee, as well as participants of the 2001 Canadian Economic Association Conference and the 2001 Stony Brook International Conference on Game Theory. This paper is based upon Chapter Two of Mathews’ doctoral dissertation.
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Mathews, T., Katzman, B. The role of varying risk attitudes in an auction with a buyout option. Economic Theory 27, 597–613 (2006). https://doi.org/10.1007/s00199-004-0571-8
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DOI: https://doi.org/10.1007/s00199-004-0571-8